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Overcome the Challenges of Strategic SRM: Managing Your Supplier Pain Points, Pressures, and Procedures

by Dr. Manfred Heil | SAPinsider

April 1, 2007

Many companies want to make their procurement department a more tactical asset, but must first overcome several organizational obstacles. Dr. Manfred Heil, Senior Vice President of Alliances and Solutions at SAP AG, examines common supplier relationship management pain points, how companies can overcome them, and the strategic processes and technologies that will help them get there.
 

Dr. Manfred Heil
Senior Vice President,
Alliances and Solutions
SAP AG

Across the SAP install base, companies today are looking to transform their purchasing function from tactical procurement to strategic supply management. And they're tackling this transformation in the face of some eye-opening statistics:1

  • Over 40% of spend in most companies is not managed by the procurement department

  • 25% of companies have no formalized procurement procedures

  • Only 61% of companies have a standard sourcing process

  • Over 55% do not have an electronic contract management system

  • Over 30% do not have an electronic purchasing system

  • More than 30% use spreadsheets to analyze their spend data

In this interview, SAP AG Senior Vice President Dr. Manfred Heil examines the pain points today's supplier relationship management (SRM) customers face, what they can do to overcome them, and how they can transform their SRM organization, processes, and technology into a strategic system that produces sustainable, profitable results.

Q: With an eye toward outpacing their competitors, many companies have been attempting to make procurement a more strategic function within the organization; just look at the growing prevalence of chief procurement officers in the last few years. What pain points do organizations need to solve to make this strategic transformation?

A: One of today's hot-button topics is compliance. Sarbanes-Oxley has meant that procurement departments must comply with certain standards regarding traceability and transparency, especially when it comes to how a company's actual spend volume is handled. Visibility and auditability are very important as well, particularly when you're trying to document the supplier negotiation process and the correct contract approval workflow. This can be particularly challenging when you consider that only 61% of companies have a standard sourcing process, and 25% still lack formalized procurement procedures.

Another big area that companies are seeking to manage, and eventually exploit, from a strategic SRM perspective is contract management. As little as five years ago, anywhere from 30% to 60% of a company's overall spend volume was not managed through contracts, opening the door to ad hoc, maverick spending and discrepancies between actual spend transactions and negotiated terms. Today, leaders in procurement have been able to achieve a compliance rate of 90%, significant progress by any measure.

Despite the prevalence of contracts in the enterprise, 55% of large companies do not have an electronic contract management system in place. There is no way to link contracts to backend systems to provide visibility so that, for example, you can see programmatically when a contract will expire and what its impact will be on procurement. We're working with big companies, including a large electronics manufacturer, that want to understand contracts within their complex and increasingly global organizations. To them, every contract provides a future opportunity, but might also represent a certain risk. There could be clauses and other language within a contract that would be critical to put into a central repository so that the company's branches located around the globe could follow and adhere to those clauses.

SRM should be a top priority for any company — regardless of its size. After all, every organization must work toward increased cost savings and process efficiencies.

Q: These pain points are all about becoming more strategic. What about the growing trend of commodities procurement, in which vendor relationships tend to be less important?

A: In that situation, even though strategic supplier relationship building is not really your top priority, you still want to approach the situation strategically. You want to leverage your volume, do sourcing, and change suppliers as needed. Assuming that quality levels are secure, you want to be flexible, equipped to move your volume from supplier A to supplier B when it serves you best.

As commodities procurement has become more prevalent, so too has the other side of the pendulum, where your suppliers are also co-innovators. If you look at most automotive companies, for example, you'll see that a supplier designs 20% to 30% of their components, such as brake systems, after the auto company provides only the requirements. The supplier then returns a proposal of what a solution for a new brake system could look like. That's an example of a co-innovation cycle. This is, of course, a totally different supplier relationship than one would have with a commodities supplier.

Your SRM systems cannot be black and white. On one hand you need flexibility, and on the other, strategic collaboration. Of course, there are still many shades of gray in between.

Your SRM systems cannot be black and white. On one hand you need flexibility, and on the other, strategic collaboration.

Q: Can you paint a picture of the benefits of this procurement transformation? What would a procurement department look like before and after?

A: SRM has changed dramatically over the last few years. Twenty years ago, the main job of procurement was to secure the supply, to make certain that materials or services would be available when needed. Then it went through a phase that emphasized taking out cost and reducing prices. Currently we are in the next development phase, which involves bringing suppliers into the innovation cycle more and more (see Figure 1).

Figure 1
The evolution of procurement: As a procurement team's capabilities expand, so too does its potential strategic value to the business

So where is procurement headed? I believe the next phases will exploit the differentiation potential. By that I mean there will be a greater emphasis on accessing supplier innovation, moving to an adaptive business model, and wielding SRM to enable supply chains to become a company's competitive advantage.

The investments that companies are making in their procurement structures, processes, and people will be directed toward using procurement as that competitive weapon. The systems to support that effort will have to be flexible, adaptable, and, for the people who rely on them every day, easy and intuitive to use.

Q: What about the rest of the SRM market space? Are other providers headed in this direction?

A: Three or four years ago, there were hundreds of SRM solution providers. But the market has undergone a consolidation. Many customers went after the best-of-breed solutions, and they learned a lot from that experience.

The current SRM market is going to consolidate even further and, to that extent, many niche players who were opening the market in various areas will instead be partnering with SAP and innovating on our platform.

It's not important how SAP defines the term supplier relationship management, but rather how we understand our customers' goals and requirements when it comes to SRM.

Q: How, then, is SAP supporting this SRM transformation? What is SAP's definition of SRM?

A: I would rather turn that question around. It's not important how SAP defines the term supplier relationship management, but rather how we understand our customers' goals and requirements when it comes to SRM. Over the last two or three years, we opened up our organization so that customers and potential customers have a voice when it comes to product development.

We introduced an SRM advisory board, which consists of procurement officers from leading companies around the globe. This advisory board meets every six months to discuss strategic topics in all arenas of SRM. What they've told us is that the strong emphasis on total cost is not going away. They have also shared with us their pain points, some of which I mentioned earlier, and all of which SAP is addressing. Today, our SRM offering addresses the strategic and business process needs of companies of all sizes.

Q: That's an interesting point, since the market often assumes that SRM is best suited to large enterprises. Why do you think smaller companies should adopt an SRM strategy as well?

A: I believe that SRM should be a top priority for any company — regardless of its size. After all, every organization must work toward increased cost savings and process efficiencies.

Large, global enterprises were the early adopters of SRM, and now the midsized market is following suit. There are many reasons for this. For example, the automation of key processes enables a smaller number of procurement staff to be more productive. Also, the implementation of an SRM application might allow the company to create formalized, automated procurement processes for the first time. Going forward, it's important to realize that SRM is for everyone.

Additional Resources

www.sap.com/solutions/business-suite/srm/index.epx



1 CAPS Research (www.capsresearch.org).


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